Atlas Shrugged: Goldbuggery

Atlas Shrugged: Goldbuggery November 21, 2014


Atlas Shrugged, part II, chapter VII

Ragnar Danneskjold continues explaining his business plan:

“I have been selling the cargoes I retrieved to some special customers of mine in this country, who pay me in gold. Also, I have been selling my cargoes to the smugglers and the black-market traders of the People’s States of Europe. Do you know the conditions of existence in those People’s States? Since production and trade — not violence — were decreed to be crimes, the best men of Europe had no choice but to become criminals. The slave-drivers of those States are kept in power by the handouts from their fellow looters in countries not yet fully drained, such as this country. I do not let the handouts reach them. I sell the goods to Europe’s law-breakers, at the highest prices I can get, and I make them pay me in gold. Gold is the objective value, the means of preserving one’s wealth and one’s future.

…I deposit the gold in a bank — in a gold-standard bank, Mr. Rearden — to the account of men who are its rightful owners. They are the men of superlative ability who made their fortunes by personal effort, in free trade, using no compulsion, no help from the government. They are the great victims who have contributed the most and suffered the worst injustice in return. Their names are written in my book of restitution. Every load of gold which I bring back is divided among them and deposited to their accounts.”

Danneskjold emphasizes that gold is “the objective value”. You can tell Rand shares the belief, common among libertarians, that there’s something special about gold, some quality of inherent virtue or trustworthiness that paper money doesn’t have. In his wedding speech from an earlier chapter, Francisco d’Anconia used the same phrase:

“Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it.”

As I’ve always said (and I like to think Ayn Rand would agree), calling something “valuable” implies an answer to two questions: valuable to whom and for what? Value can only exist in relation to a purpose, and purpose in relation to a mind.

So what can you do with gold? You can’t eat it or wear it; you can’t build houses with it or make tools from it. It’s too soft, too heavy, and too rare for the usual uses of a metal. It has some limited industrial uses, but it’s safe to say that those aren’t why people desire it so much.

No, the reason people value gold is for its intangible, aesthetic qualities: its striking color, its luster, its reassuring heft, the promise of immortality implicit in the fact that it doesn’t rust or tarnish. “Gold is an objective value” sounds better than “We like gold because it’s shiny” – but the latter is more honest and closer to the truth.

Contra Rand, nothing makes gold valuable except that people treat it as valuable. We collectively agree to use it as a store of wealth and a medium of exchange. But the same is true of paper money. Neither is any more or less “objective” than the other, because money, by definition, is something that can be traded for goods and services but isn’t itself useful for anything. (If you’re trading useful goods, you have a barter system.)

Granted, in the eyes of goldbugs – the ranks of which include Ron Paul, Glenn Beck and even the GOP as a whole – gold has one other desirable quality, which is that it can’t be created on demand. They repeatedly argue that governments can print unlimited quantities of paper money, and in a crisis will be tempted to do so. Since you can’t do this with precious metals, they say, a gold standard keeps governments “honest”. That’s probably what Rand was thinking in this section.

It’s true that excessive money-printing can devalue the currency, causing inflation or, in the worst cases, hyperinflation. But using the gold standard just introduces an opposite problem: that the money supply can’t grow in sync with the economy. After all, why should the size of our economy – the total quantity of goods and services we can produce – be constrained by the amount of shiny yellow metal we can dig up?

When your economy grows faster than the amount of money in circulation, prices fall, and you get deflation. A modest amount of inflation is beneficial for an economy, because it encourages people to spend and invest today. But deflation is far more dangerous. Since prices are falling, people tend to delay consumption, reasoning that it’s better to wait when your money will buy more tomorrow than it does today. But since fewer people are spending, that means there’s even less money in circulation, which leads to still further deflation. This kind of deflationary spiral is almost inevitable with precious-metal currencies, and it’s very hard to pull out of once it’s begun. The Great Depression was caused in part by deflation, and the countries that went off the gold standard in the 1930s had much stronger recoveries.

Even the most common alleged advantage of gold – that buying it protects an investor from market gyrations – turns out not to be true. Gold prices show little or no correlation with inflation rates or volatility. And like any asset, gold can go down as well as up: gold prices have plummeted in the last few years, resulting in huge losses for some of the world’s biggest hedge-fund managers who bet heavily on the metal.

If you invest money in a productive asset – a plot of arable land, a business, a portfolio of stock – then that asset will make money for you, and your wealth will grow. But if you buy gold, it just sits in a vault, doing nothing. Investing in gold is premised solely on the greater-fool theory that someone, at some future point, will be willing to pay more for it than you did. That’s the point of a legendary quote from Warren Buffett:

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side…. its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually).

…A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions… The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

In spite of these facts, many people still cling to gold as the essential investment, and it’s hard not to speculate that the real reason is, well, because of Ayn Rand. As Barry Ritholtz says, “More than any other investment, gold seems to involve a stream of fantastic tales of imminent societal collapse”. Sound familiar?

I’d guess that quite a lot of goldbuggery can be traced back to the influence of Atlas Shrugged and people who mistake this work of fiction for reality. The Randian belief that our political system is hopelessly corrupt and sliding into socialist oblivion has instilled in many libertarians an overwhelming urge to buy gold, in an attempt to protect themselves from the mirage of coming disaster that their Leader has foretold. Ironically, despite coming from the self-appointed supreme acolyte of reason and capitalism, this belief has more in common with apocalyptic religion than it does with anything approximating sound economic logic.

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